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Spanish Stocks Staring Over the Edge

By

Vincent Cignarella

Mar 29, 2012 2:35 pm ET

When investors take the pulse of an economy, one indicator they invariably look to is the country’s stock market. That measure in Spain, the Bolsa de Madrid’s IBEX 35, has fallen from a recent peak in April of 2010 by over 31.5% and is teetering on the edge of an outright meltdown.

It’s no wonder that indicator is forecasting trouble: over 38.5% of the IBEX 35 is comprised of banks, construction and investment services companies, the three industries still reeling from a real estate bubble that is yet to fully deflate.

Banco Santander SA, the largest bank in Spain and all of Europe by market cap, makes up 16.47% of the index alone and its stock price since mid April 2010 is down 47.5%.

There is a real recession underway in Spain, with the IMF forecasting a 1.7% contraction in the economy in 2012. Slower growth will not only undermine the government’s tax revenues and so potentially exacerbate its debt crisis, it will lead to lower Spanish corporate profits, which could push the IBEX to levels not seen since the 2008 financial crisis.

That kind of selloff would be a real danger to Spain’s banking system, after getting something of a temporary reprieve from the European Central Bank’s long-term refinancing operation in December.

Many used that LTRO, which gave banks three-year money at 1%, to buy sovereign bonds. According to the latest ECB data released on Monday, Spanish banks sovereign debt holdings rose after the LTRO to a record EUR229 billion. There has been precious little lent out to the private sector.